Will $50 billion fix housing? It may be a down payment

WASHINGTON — President Barack Obama next Wednesday will roll out a plan to attack the trigger of the current global financial crisis — rising U.S. mortgage delinquency and foreclosure rates.

However, he'll be trying to fix one problem as another perhaps larger one is unfolding.

Obama will unveil in Phoenix how he'll spend some $50 billion, carved out of the Wall Street bailout money passed in October, to help reverse the soaring number of mortgage delinquencies and defaults.

In light of Obama's pending plan, three major banks announced on Friday that they would suspend foreclosures indefinitely while the government develops its plan. The banks are Bank of America, Citigroup and J.P. Morgan Chase.

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Because the foreclosure problem was allowed to fester so long, home prices nearly everywhere in the nation have fallen. Millions of homes now are worth less than their mortgages, making it impossible for many homeowners to refinance even with today's low mortgage rates.

A trial balloon floated this week suggests that Obama will follow the suggestions of Federal Deposit Insurance Corp. Chairman Sheila Bair, who thinks that banks must take some losses and get owners of distressed mortgages into a monthly mortgage payment that amounts to somewhere from 31 percent to 38 percent of their monthly after-tax income.

Bair proposed this idea, carrying it out in instances where her agency seized failing banks and could rework loans on their books. She was opposed, however, by then-Treasury Secretary Henry Paulson and others in the Bush administration who wanted to keep the focus on problems in credit markets.

Consequently, the new foreclosure-relief plan by new Treasury Secretary Timothy Geithner comes late in the game and in a deteriorating environment. Since 2006, when the scope of the housing problem first became apparent, more than 1 million homes have been foreclosed. Some estimates suggest that number could increase to 6 million by 2013.

Even as Obama tries to halt the foreclosures, the deepening recession layers on new problems. Beyond the shoddy subprime mortgages given to the weakest borrowers, the default rate is climbing for borrowers who'd been in good standing as they join the ranks of the more than 3.6 million Americans who've lost their jobs since the recession began in December 2007.

When Congress began looking seriously at the housing issue in 2006, there was strong opposition, particularly among Republicans, to using taxpayer money to rescue homeowners who made bad choices. That philosophical opposition, however, allowed a regional problem in states such as California and Florida to spread nationwide, reducing home prices across the board.

"I think the macroeconomic effects of this are now so clear (that) there is more support for government intervention," said Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee. "This is not going to get resolved unless there is some public money."

Speaking to a small group of reporters Friday, Frank said the Obama administration will put forth a plan that involves shared burdens on banks, borrowers and the government. The federal government won't seek to buy up distressed mortgages; instead, it will contribute towered lowering the mortgage burden.

"There will be federal money used now to buy down the mortgages somewhat," said Frank.

White House Press Secretary Robert Gibbs cautioned Friday against expecting the housing plan to be a panacea.

"I will tell you that the plan that the president and his team are working on is not . . . intended to be measured by one day's market scorekeeping, but instead to ensure that the 10,000 Americans each day that have their homes foreclosed on and the millions more that are barely getting by are protected," he said.

Pressure is mounting on banks to do more to prevent foreclosures. Banks have championed voluntary efforts, and often cite numbers of modified mortgages. They seldom distinguish, however, between whether they simply let a homeowner make a late payment versus converting an adjustable-rate mortgage into a fixed-rate mortgage with a lower monthly payment.

So far, voluntary programs have had no significant impact.

Two government programs give incentives to lenders to take a loss and pass the newly refinanced mortgage into FHA or Fannie and Freddie, but neither has received much support or interest from lenders.

"Anything that's voluntary that requires a haircut (loss by lenders) is having no effect," said Rick Sharga, a senior vice president of RealtyTrac in Irvine, Calif., who thinks banks had been playing for time but now will have to take big hits on their books to rework mortgages and prevent foreclosures.

Foreclosures were up 81 percent nationwide last year, with more than 3.1 million foreclosure filings. They're up 225 percent since 2006 — the final year of the boom before things began to unravel — according to RealtyTrac.

In addition, the median home price has tumbled nationwide. It stood at just over $180,000 in the last three months of 2008, versus $205,000 in the year-earlier period, according to the National Association of Realtors. For all of 2006, the final boom year, median home prices neared $222,000.

As home prices fall, more homeowners go underwater, meaning they own homes worth less than their mortgages. Harvard University economist Martin Feldstein estimates that 12 million American homeowners now have negative equity in their homes — a number that translates into roughly one in five homes.

If home prices slide another 10 percent, it would take many homeowners 10 years or more, by historical rates of return, to just to break even on the home they own. That's a decade or more before they ever earn a cent of equity.

"I think you have to get some cooperation between the creditors and government to write those mortgages down to something equal or close to the current value of the property itself," Feldstein said in an interview Wednesday on CNBC. "Otherwise, individuals are going to have an incentive to walk away" from their homes.

If Feldstein is right, it will cost a lot more than $50 billion to fix America's housing crisis.